The Dollar's Denial

In the 12th and 13th centuries, Venice was the centre of the trading world. Crusaders and merchants of all sorts came through this great city to travel to and from the Holy Land. The streets were awash with coins from all over the world. Thus the money changers of St Marks Square were pivotal characters in the commerce of the city, and indeed the globe. Every day, the money changers sat at their benches (called banca), coins piled high in front of them, shouting various exchange rates as currency ebbed and flowed. If a Crusader ship docked laden down with coins from the Levant, the value of the Levantine coins would fall in response to the huge new supply, and vice versa.

When a money changer went broke, it was customary to smash his bench. The resulting broken bench or (banca rotta) was borrowed by Norman merchants on their way home from the Crusades to Ireland and England, giving us the word bankrupt.

Looking at the dollar as it plunges to record lows against the Euro, the image of the Venetian money changers and their smashed benches comes to mind, not because America is anywhere near bankrupt, but because the dollar has always been a leading indicator of where the US economy is headed.

Due to the tyranny of daily media updates and the nano-term nature of financial markets, we rarely get the opportunity to look at today's developments in a historical context. Yet if we go back to our money changers in Venice with their broken benches, we see that the dollar's fall is much more fundamental than the reaction to the latest price of data on the US economy. It is part of the gradual debasement of the US currency as the US government tries to fool its own people about the long-term decline of the United States.

An easy way to look at the emasculation of the dollar is to think about the expression "as good as gold." This comes from the idea that nothing could take the shine off this most exotic of metals, and that gold is an incorruptible store of wealth. Yet, over the years gold has been corrupted and tampered with, leading to a fall in the value of certain currencies.

In the old days, gold coins were debased by Kings who wanted to raise more money for wars. They added differing metals to coins in order to mint more of them. However, you can't fool all the people all the time, and inevitably these debasers were exposed.

If we fast forward to our modern age we see that the US, in particular, has been debasing its currency for years. Over the past century the world has gone through periods of tying currencies to gold. Up until the 1970s, the amount of dollars in circulation had to be matched by the amount of gold in the Federal Reserve's vaults. If the US printed more dollars, the dollar/gold rate would fall. In 1968, the United States, facing mounting costs from the widening war in Vietnam, permanently took the dollar off the Gold Standard. Since then, all governments have followed suit.

In the past four decades, we have seen the Fed print money at a rate between 5% and 10% per year while pretending that this is not happening. The US also persuaded other central banks to link to US treasury bills instead of gold, and the world fell for this. So we have a situation where the US prints money to pay for its day-to-day spending and then borrows the cash from the rest of the world, issuing IOUs in this increasingly worthless currency as collateral for the loans. You've got to admire such chutzpah!

Not surprisingly, the dollar has been on a downward path for a few decades. Of course, there have been years when it bucks the trend, but ultimately the purchasing power of the average American Dollar has been embezzled relentlessly.

So far there has been precious little questioning of this long-term debasement of the world's biggest currency. Maybe the reason for this is that it is the right thing to do. If the rest of the world is stupid enough to give the US a free lunch, then why shouldn't the Americans take it? If I were an American I'd certainly be content with that.

The US government, in denial, can adopt the Augustinian line of "give me chastity and contingency -- but not yet." The Catholic Church has always, even in Venice's heyday, believed in the redemptive power of confession. One wonders as the dollar heads downwards whether the financial markets will be so forgiving.

David McWilliams is the author of The Pope's Children (John Wiley and Sons), available now.

Comments

[dadw5boys]

Are you just catching up with the Republicans Plan to destroy Social Security and Medicare??

THIS IS HOW THEY DO IT!!!!!!!!!!!!!!!!!!!

[PacificGatePost]

The fact remains that America is still the world's preferred depository for hard earned or stolen cash. There is no alternative in sight.

It also remains for the American taxpayer to regain confidence and start saving. ...

http://pacificgatepost.blogspot.com/2008/02/rebounding-us-economy.html

There are strategies for rebuilding. Now's a good time as any to start.

[bernusdellus]

Add to the above situation the fact that the guys printing all the worthless paper dollars [The Federal Reserve Bank] aren't even part of the government!

The fed is a commercial bank wholly owned by around a dozen shareholders. About half of these shareholders are British. Do you still think the U.S. won the war of independence?

America won the battles but Britain won the war. Bush, poor frontman patsy that he is, and his sinister backers are making it worse at a frightening rate.

[chordchaser]

Wow, the truth.

And just look at all the people denying it. I always wondered how people didn't see this, and now I see all the reasons why.

It's no wonder we elect the representatives we do.

[repearwo]

I am not sure of your basis for saying any of this. The money changers were selling a product. Of course prices would vary with varying markets. Leave prices high and sell a few or drop your prices and sell a lot. I guess what you describe in Venice is a precursor of Wal-Mart. The price that the money changers charged did not affect the real value of the currency, any more than the change on price of any other commodity in that economy.

I also do not see any attempt on the delusional Bush Administration to tell us that our economy is failing. If anything they have stacked the statistical deck to make the economy look better than it is
The American Economy is fine if you look at it from a point of view that looks only at our ability to meet the basic needs of our people, but that is not what the economy is structured for. Essentially the working classes, once known as the Middle Class, are but a machine through which to make money on the consumption of useless products. To achieve this they offer useless money in the form of credit. It is now a house of cards which could fall at any minute.

When it does fall we will believe that the world has ended, just as we did in the Great Depression, but it will not have. We will just have to learn to live with less and live a more basic existence.

The fly in the ointment is that the corporate powers think that the money they have is real. They want it to hold its value, hence the lame attempts by Bernanke to prime the consumption machine. When the Corporate interest began to move their operations overseas they forgot that the consumption machine needs fuel (jobs) to work, so they used credit to replace the earned money. Since the Credit money was not real (had no real value - production - behind it) the growth in the economy was not real.

If all the countries in the world that have loaned the US about 30% of its GDP were to call in those notes the US would sputter to a halt. China does not have to have an Army to destroy us it just needs to pull the plug on our debt.

For the US to be competitive in the world we must allow our Dollar to devalue.

If at the beginning of the last century 25cents could buy you a complete steak dinner with wine, why can't we have the same now? The answer is we can. Money does not exist naturally. It is a creation of man and behaves as man allows. A currency must be based on real value. So comparing how long it took to earn 25 cents in 1905 would tell us in terms of work hours the price of that steak dinner. Then convert those work hours today to see how much a comparable price for a steak dinner would be today.

With allowances for development and standard of living, wages around the world should be relatively comparable. If that were the case there would be no movement of jobs to obtain lower costs of production. That is not the case now.

The dollar's drop is good. If one were to try to achieve parity in World Wages by lowering wages, there is no guarantee that prices would drop quickly enough. By the currency devaluing, the wages and prices both drop in tandem.

[kevinabt]

When you devalue a currency it becomes less valuable. So when you go to buy something you need more of the currency to do so, prices go up. Prices do not go down when a currency loses value, you have that backwards. Most people who hold dollars would like those dollars not to lose their value. Just like with any other form of wealth you don't want it to become worthless.

The silver lining to this would be that the whole fiat currency system is corrupt and destructive overall. The coming collapse could potentially make way for an honest money system, like one backed by gold or silver that isn't vulnerable to manipulation the way fiat systems are.

[repearwo]

Actually I used the wrong term, deflation is the word I wanted, but there is only a slight degree of difference. That difference is how the action is taken. In any case our money needs to lose its value as compared to other currencies.

The idea that some how Gold or Silver has some real value more so than paper is sheer folly. We could use rocks as currency and have that currency based upon real value, and it would be fine. (a little hard on the pockets)

For value to be created something has to be created that was not there before. Making "money" out of thin air which is what our finacial markets do now, is the real destructive force.

The stock market has become a huge casino where over half of the instruments are beting on some performance.

[northof55]

repearwo,

I read your thread here with kevinabt. It is hard to explain that currency has no value, only goods. I believe currency is merely a mode for the exchange of goods and services. To many dollars can't cause inflation, the ability to raise prices on goods cause inflation. Your also right that value has to be created. Creating a dollar doesn't create value. The dollar is merely the medium for value to be created, usually by a loan.

Labor is a perfect example. Cheap overseas labor has been driving down or keeping wages steady for years. So higher wages haven't been contributing to inflation. The Fed used to use the Phillips Curve and kept the unemployment the high until the global economy allowed companies to offshore. The Phillips Curve is no longer in use and unemployment can be pushed lower due to no wage increases. The wages that are going higher are in high end services but they have little effect on actual goods you buy for everyday life. You can take them or leave them.

The currency trading market and a dollars value going up or down is a game. Nothing more. Its like Vegas. And your right, we are in deflation. Debt is being extinguished, housing prices are going down, wages are stagnating and people are sitting back and not spending.

[Looplinker]

There is a lethargy growing in the USA. At one time we had the optimism to take on challenges and solve them, but not anymore. Perhaps we have become victims of the corporate complex that influences policies in this country. After all what is good for Exxon does not necessarily imply that it is good for the USA.

I am old enough to remember in every Presidential election cycle since 1972, the candidates" rhetoric about eliminating our dependence from foreign oil and, at every State of the Union speech this is echoed. For 36 years nothing has changed. The price of oil is obscene and there is nothing we can do about it but grimace and bear it.

So much for the old American trait of "Can Do". It has become "Can"t Do". And the same beat goes on in the speeches by Obama, Clinton and McCain, promises of hope that will be undelivered when one of them is elected. This is not the same country that challenged itself to go the moon in a decade and accomplished it. It cannot challenge itself to the goal of escaping its dependence on foreign oil and on becoming an oil-independent economy in a decade. Why? Because the corporate interests of Exxon trump the interests of the US people every time.

[Rockyman]

Yes, the "free lunch" is over. The world is 'on' to us. We are now fiscal 'toast'. Let's see how that tastes!

[hiprogloho]

Since ancient times the concept of money has been as much of a fairytale as royalty. So I laugh when economists get all numerological over paper financial institutions based in overt thievery or corruption.

Make no mistake. The master of money is the swindler con man who steals, buys and sells it. Just like in days of lore, the rogue who declared himself king was the murderer who killed all his enemies.

Machiavelli was right. The common law is a lie. Peace on earth is but a result of good appeasing evil amid constant class struggle. And the US economy has always been a moneyman's house of cards.

[Not Blind]

Not only the US dollar, but our entire economy is debased. Every president, up until Reagan, raised taxes to fund a war. This was part of the sacrifice Americans paid for military action. When Reagan, Bush I, and now Bush II cut taxes, increased military spending and engaged in wars, the cost of those coupled with tax cuts for the wealthiest, meant that the American people (those without wealth, whose sons and daughters were sent off to those theatres) paid double. First, their children were at risk, and they along with other average citizens paid the tab for the largesse. In 1980, our national debt was about $2.5-trillion. Under Reagan, it doubled to nearly $5-trillion, and then it made a small decline under Clinton, but has nearly hit the $10-trillion mark. The Iraq war has cost nearly $4-trillion, and predictions are if we stay the course, will end up costing more than $5-trillion: much due to waste, mismanagement, corruption, bribery, and greed. Hiring no-bid private contractors to manage this war was a huge mistake. They've over-charged and under-performed since they started. Needless spending on private contractors did not improve the efficiency of the military, but has hindered it in many ways. Halliburton was charging for filtered water, but giving our soldiers un-filtered water for months. Paul Bremmer got Blackwater involved. Their mercenaries get 10 times the salary that the average soldier gets. Our soldiers are held accountable for their actions, but the mercenaries get immunity for murder. Companies that were supposed to provide our soldiers with armored vehicles, equipment, and body armor failed, and many lives were lost as a result.
Anyone whose managed a business or even a household budget knows that reductions in income means spending less to offset the loss. Just like our government, Americans got hooked on credit for everything, and now the party's over. Housing prices are falling, and many owe more on their mortgages than their property is worth, mostly due to greedy and dishonest loan and real estate brokers, and gullable people who did not ask about or read what they signed. Corporations are cutting back or outsourcing jobs, so unemployment is rising. That's why there's been a cut-back on spending and purchases.
The lesson to be learned is a balanced budget! Pay cash as-you-go. If we can't afford this war, then we need to end it, or substantially raise taxes to help mend our debt. At present, Social Security, Medicare and other trust funds have been looted, so those paying into those systems will not receive a fraction of the benefits for which they've paid their entire lives. The trickle-down, laissez-faire economic policies of Hoober, Reagan, Bush I and Dubya have resulted in depressions and recessions. The de-regulation and notions of no accountability on the part of leaders (government and corporate) has led to the S&L crisis, utility outages, corporate corruption (Enron, etc.), and always those average Americans take the hit: be they stockholders, employees or consumers.

[LewisR]

Bash the falling dollar if ya want, but I understand that US recyclers who send scrap metal and used paper to China are making a killing. I would think that Huff folks would love how the dollar's slide is cleaning up this country and helping China to reuse resources instead of ginding up what's left of the world that we haven't already chopped down.

[Rockyman]

It's hard for me to be elated because recyclers "are making a killing" selling scrap to China. Seems to me the fundamental fiscal mistakes we have made and the repurcussions are hugely negative!

[LewisR]

US exports have never been more popular, and NYC and other tourist destinations are raking in foreign shoppers' $. Those weren't "fundamental fiscal mistakes", they were planned and executed just like Cheney wanted. But maybe you like the way China is quickly owning our country. You don't have to like it, I don't even like it, but to call it a mistake is to reveal your lack of understanding on this issue.

[kcroyalscott]

This article was great. Ron Paul just ran an entire campaign on monetary policy and was ignored. America is screwed. At least this one.

[rroy]

History is loaded with the rise and fall of empires.

Looking back at at history and patterns of rise and collapse,of it's numerous empires,one can't help but get a feeling it is now our turn!

Just about every collapse is preceded by the arrogance and megalomania of it's leadership,and similar attitudes of a large part of it's populace.

We are constantly bombarded with propaganda of how great our country is with it's many freedoms,while leadership whittles away at these"freedoms"!

Then one day we look down and are shocked to discover the tide is washing away our feet of clay and we are about to fall over!

Who has this happened to in the past?The list is almost never ending,The British Empire,The Third Reich,The Soviet Union,The Roman Empire,The Japanese Greater Co Prosperity Sphere,The Huns,Ancient Egypt,and on and on.

What is of signifgance is many of these collapses have resulted in Phoenix like resurections of some of these failures.Like Germany, England, Japan,Etc.Let's hope we will be lucky enough to emulate them.

I still remain mildly optamistic.

[plutorage]

Maybe it is all those "entitlement" programs lilke Universal Health Care which people enjoy in Europe that is sending the Euro to new heights against the dollar. Here in the USA we have a wise government which has protected us from the follies of European style "socialism" and instead has given us a strong "defence" against countries like Iraq who were threatening our "existence".

NOT !!!!

[Overd0g]

The more "services" the government "provides", the less free we are. I'm afraid that the European model of low growth/high unemployment that you long for is soon to be upon us.

[demockracy]

This is a typical right-wing meme -- and untrue. If you count the U.S. prison population as unemployed, there's only a tiny difference between European and U.S. unemployment. The difference: Europeans imprison roughly 80 per 100,000 of their population, while the U.S. imprisons 800 per 100,000.

In effect, the U.S. runs the S&M economy, where punishment is more fun than effective policy.

Growth is a thornier issue. Consider this: if you had invested a nickel in 1AD at 5% compound interest, you would now be entitled to two earth-sized globes of gold as a return on investment. There's something to be said for qualitative changes in what's valuable (not many antibiotics in 1AD, for example), but growth eternal cannot be all it's cracked up to be as a remedy for all economic ills. In fact it is anathema to sustainability.

(See former World Bank economist Herman Daly's "Beyond Growth" for more)

[Americanabroad]

Unemployment in Denmark has just dropped to 2.1%. Most of Norhen Europe is booming. You have no idea what you are talking about.

[CSE]

In a related discussion guaranteed to make your stomach turn, see the link below.

Here's the obligatory tickler for you hounds out there...

"Even a cursory reading of newspaper articles about the Department of Defense will turn up major differences in statistics about its expenses. Some 30-40% of the defense budget is "black", meaning that these sections contain hidden expenditures for classified projects. There is no possible way to know what they include or whether their total amounts are accurate. There are many reasons for this budgetary sleight-of-hand - including a desire for secrecy on the part of the president, the secretary of defense and the military-industrial complex - but the chief one is that members of Congress, who profit enormously from defense jobs and pork-barrel projects in their districts, have a political interest in supporting the Department of Defense. "

http://www.atimes.com/atimes/Middle_East/JA24Ak04.html

[dadw5boys]

BUSH GIVING TAXPAYER A PAY DAY LOAN OF $600.00.

THAT $600.00 WILL COST $2,800.00 BY THE TIME IT IS REPAID TO THE FEDERAL RESERVE WITH INTEREST!!!!!!!!

[robinhood1]

The $600 payments are going disproportionately to lower paid workers and Social Security recipients. The bill will eventually be paid mostly by upper income taxpayers. Fairness is in the eye of the beholder. It's too bad there isn't a strong Libertarian Party functioning in the country, one that would keep it out of unnecessary wars, keep taxes low and keep politicians away from the bedrooms of the nation. All you successful members of Generations X and Y, get ready for a big tax increase coming as early as next year. Someone has to pay for the war in Iraq, the Baby Boomers' Social Security payments, rebuilding our decrepit public housing projects and the welfare checks sent to 15 year old unwed mothers. Both the Republicans and Democrats have failed the country. Their children will be stuck with the bills and probably a much lower standard of living.

Don't give Bush all the credit for the "payday loan". Both houses of congress are controlled by Democrats.

[WIpatriot]

dad, it is not likely that it will EVER be repaid.